Sunday, February 4, 2007

U.K.: Banks living on borrowed time

When the high-street banks report their results over the next month or so, virtually all are expected to announce a drop in bad debt provisions. Yet, according to last week's statistics, the number of people becoming insolvent rose by almost 60 per cent last year - and experts are predicting a further 20 per cent increase this year - while house repossessions are also rising sharply.

There is little doubt that a growing number of people (107,000 last year) are having difficulty repaying credit cards and other unsecured loans, but far more of us are still increasing our borrowings. However, instead of splurging on credit cards we are adding our debts to our mortgages. Mortgage borrowing rose by a fifth last year, to more than £360bn, and the Council of Mortgage Lenders expects a further rise this year; credit card borrowing, by contrast, fell 2 per cent to £120bn. Unsecured lending on cards and other personal loans represents just 17 per cent of the £1.3 trillion personal debt total.

Article continuesAnd that means rising house prices - up 9.3 per cent last year - continue to bail out most borrowers and their banks. While repossessions are high - 17,000 in 2006 - they are still less than a quarter of their 1991 peak, and the number of borrowers in arrears is actually falling. 'The UK consumer has been fairly sensible in what he is doing, looking at secured, not unsecured, lending,' says Ian Poulter, banking analyst at brokerage Teather & Greenwood. By remortgaging, consumers can transfer their credit card debts to secured loans, buying not only time but also lower interest rates.

Of course, that helps only if you own a house and can carry on paying the mortgage. For the minority not in that lucky position, the insolvency statistics suggest that life could well be getting tougher.

The increasingly acrimonious disputes between banks and the debt management companies that have sprung up to help us deal with our borrowings is already having an impact. Individual voluntary arrangements, under which borrowers agree to repay some of their debts over five years, all but stagnated in the last quarter of 2006. That reflects the fact that some lenders are taking an increasingly hard line on approving IVAs. Northern Rock and HSBC, for example, say they will not approve deals that give back less than 40p for every £1 they are owed (a substantially higher threshold than the industry norm of 25p); credit card company MBNA is taking a similarly hard line, while some lenders refuse to consider such arrangements.

Judging by statistics from The Insolvency Exchange (TIX), set up in November to advise lenders on negotiations with insolvency practitioners, there is good reason for banks to be suspicious. TIX has already signed up HBOS and HSBC, which means it sees about 70 per cent of all IVA proposals, and it found that fees vary from £1,500 to £15,000. TIX rejects a quarter of all proposals, and asks for modifications on a further 65 per cent of them. Chief executive Mark Onyett says he expects the firm to have an impact: 'It could weed out the good and the not so good - who is giving good advice to debtors and who is managing the IVA through the life cycle.'

TIX's research also highlights the perils of those seeking an IVA: the majority of people whose cases it sees have annual incomes of £12,000-£15,000, and, says Onyett, 'quite a lot have debts of more than three times their income'. That, says John Hall, chief executive of debt management company Invocas, underlines the fact that the banks have only themselves to blame. 'They brought on their own problems: the UK economy has been kept going on consumer spending.'

For the moment, they are being bailed out by a buoyant housing market and low unemployment. Even with the recent interest rate rises, few are expecting repossessions to reach the levels of the last housing downturn. But if the economic climate cools, banks could be stuck with a painful bad debt headache.

At debt's door

Two of the largest providers of IVAs, Debt Free Direct and Accuma, issued surprise profit warnings last month.

While Accuma said approval rates had climbed back from 78 to 85 per cent, its shares remain less than half their price two weeks ago. The problem is not just the hard line being taken by some banks; rather it is that the sector's rapid growth and generous fees have attracted too much competition. Some customers, too, may be deterred by recent bad press.